Testing Restrictions in a Flexible Dynamic Demand System: An Application to Consumers' Expenditure in Canada (original) (raw)

The paper develops and tests a flexible dynamic demand system to better understand consumer expenditure behavior in Canada. It challenges conventional static demand models by incorporating dynamic adjustments in consumer behavior, addressing habit persistence and adjustment costs, and applying an Almost Ideal Demand System framework to assess long-term preferences. The findings highlight significant differences between dynamic and static demand models, revealing that the latter may inadequately capture consumer response to price and income changes.